Construction Spending Reaches a 7-Year High

The U.S. economy is getting a boost from stronger construction activity while manufacturers are struggling from a stronger dollar that hurts the export business. Tight labor markets continue to drive gains in the housing sector.

Outlays for residential and nonresidential projects were up for the eight straight months, and climbed 0.7% in July, the Commerce Department said on Tuesday. That put the seasonally adjusted annual rate at an estimated $1.08 trillion, the highest level since May 2008. It grew by a similar 0.7% in June.

An increase in the building of houses, factories and power plants led to a 13.9% jump in construction spending in the 12 months through July, the biggest year-over-year gain since March 2006. Spending on government building projects slipped slightly, although it has risen over the last year largely because of the construction and maintenance of highways and streets. Other reports also point to the strength in residential construction. Housing starts rose 0.2% in July to a seasonally adjusted annual rate of 1.21 million homes, the government said last week. All of July’s gains were driven by construction of single-family houses, which climbed 12.8% to the highest level since December 2007. In July, construction of single-family houses increased 2.1%, factories rose 4.7% and power plants grew 2.1%.

“We expect housing activity will continue to strengthen, underpinning greater residential investment in the coming quarters,” said Gregory Daco, head of United States macroeconomics at the forecasting firm Oxford Economics.

Meanwhile, U.S. home buyer demand remained steady in July, although consumers did not react significantly to easing mortgage rates. Contracts to buy previously owned U.S. homes rose less than expected in July, but continued to suggest upward momentum in the housing market recovery. The Pending Home Sales Index, based on contracts signed last month, as released by the National Association of Realtors, increased 0.5% to 110.9.

Pending home contracts become sales after a month or two, and last month’s increase suggested further gains in home resales, which reached an 8-1/2-year high in July. On a yearly basis, pending home sales increased for the 11^th consecutive month and rose 7.4%, indicating the strengthening housing market. The July Index is the third highest reading of 2015. Contracts increased 4.0% in the Northeast and were unchanged in the Midwest. They rose 0.6% in the South, but fell 1.4% in the West.

Contract activity in most of the country held steady last month, which bodes well for existing sales to maintain their recent elevated pace to close out the summer,” said Lawrence Yun, chief economist for the NAR in a release. “While demand and sales continue to be stronger than earlier this year, realtors have reported since the spring that available listings in affordable price ranges remain elusive for some buyers trying to reach the market and are likely holding back sales from being more robust.”

Overall Economy Gets a Boost from Construction

Gains in construction, including the groundbreakings for houses, apartment complexes and commercial centers, have laid a foundation for broader economic growth. The government said last week that the economy expanded at an annual rate of 3.7% in the April-to-June quarter, after edging up just 0.6% in the first quarter.

“The U.S. economy continues to move forward. Manufacturing is slowing, but domestic demand remains strong,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “With families buying houses as well, we should see an upturn in the demand for manufacturing goods that go into building those products.” The economy grew at a 3.7% annual pace in the second quarter. The Gross Domestic Product growth estimates for the third quarter are currently above a 2.5% rate.